Broadcom to acquire Zscaler?

Update (May 27, 2024): Jay Chaudhry has responded on Linkedin refuting our story.  We standby our reporting.

In a move that underscores its aggressive expansion strategy, Broadcom has started discussions to acquire Zscaler, a leading cloud security company, for $38 billion according to people familiar with the discussions. This acquisition price represents a 45% premium to Zscaler’s closing price on Friday, May 24, 2024, highlighting Broadcom's commitment to strengthening its position in the cybersecurity market.

The Significance of the Zscaler Acquisition

Zscaler is renowned for its innovative approach to cloud security, providing a comprehensive platform that secures user access to applications and the internet. The company's flagship offering, the Zscaler Zero Trust Exchange, has redefined how enterprises protect their data in a cloud-centric world. By ensuring that users connect directly to applications and not the network, Zscaler has significantly reduced the attack surface, making it harder for cyber threats to infiltrate.

The acquisition of Zscaler is a strategic move for Broadcom, complementing its existing cybersecurity assets and providing a cutting-edge cloud security solution that is highly regarded in the industry. This acquisition is expected to enhance Broadcom's ability to offer end-to-end security solutions, addressing the growing demand for robust, scalable cybersecurity in an era where cyber threats are becoming increasingly sophisticated.

What Zscaler Brings to Broadcom

1. Innovative Cloud Security Solutions: Zscaler's platform is designed to secure all user and application traffic, regardless of device or location. This capability is critical as more enterprises adopt remote work and move their applications to the cloud. By integrating Zscaler’s technology, Broadcom can offer a more comprehensive security solution that addresses the unique challenges of the cloud era.
2. Zero Trust Architecture: Zscaler's Zero Trust Exchange is based on the zero trust security model, which assumes that threats can exist both inside and outside the network. This model requires strict verification of every user and device before granting access to resources. The inclusion of Zscaler’s zero trust approach will significantly enhance Broadcom’s security offerings, providing customers with a robust framework to protect their digital assets.
3. Strong Customer Base: Zscaler serves a diverse range of customers, from small businesses to Fortune 500 companies. Its extensive customer base and strong market presence will provide Broadcom with new opportunities to expand its reach and deepen its relationships within the cybersecurity market.

Hock Tan: The Mastermind Behind Broadcom’s Growth

Hock Tan, the executive who built Broadcom into a $250 billion tech giant through a series of bold acquisitions, has signaled more dealmaking after his $69 billion move for VMware. At 71 years old, Tan has just signed on for another five years as chief, indicating his continued leadership in Broadcom’s aggressive expansion strategy.

In a recent interview with the Financial Times, Tan stated that Broadcom would still look at semiconductor acquisitions, even after its hostile $142 billion bid for Qualcomm was blocked in 2018 by then-US President Donald Trump. Broadcom’s bid for datacentre software provider VMware is also being examined by competition enforcers in the US, Europe, and the UK. Despite heightened scrutiny on mega tech mergers, acquisitions remain a “key part of our strategy,” Tan said. Broadcom maintains a “select” list of “companies with assets that we would love to buy,” spanning both semiconductors and software.

Tan, born in Malaysia and a graduate of MIT, has worked in tech since the early 1990s. He was hired to run what is now Broadcom in 2006, after private equity firms KKR and Silver Lake paid $2.66 billion for Avago Technologies. Avago, which originated in Hewlett-Packard’s semiconductors division, grew rapidly through acquisitions, including LSI, Brocade, and the $37 billion takeover of Broadcom in 2015, which gave the group its name.

Tan’s dealmaking streak hit a snag in March 2018 when Trump blocked the Qualcomm deal due to national security concerns. Broadcom then relocated its headquarters from Singapore to California, completing a plan that had Tan and Trump shaking hands in the Oval Office months earlier. Looking back, Tan acknowledges that going hostile with Qualcomm was a mistake, emphasizing the importance of friendly, arm’s-length acquisitions.

Tan did not leave his bankers idling for long. By the end of 2018, Broadcom had closed an $18.9 billion acquisition of CA Technologies, followed by a $10.7 billion purchase of Symantec’s enterprise security business. Having received regulatory approvals its $69 billion cash-and-stock takeover of VMware, including $8 billion of debt, it will be Tan’s biggest deal yet.

Strategic Vision and Challenges Ahead

Asked how VMware fits with Broadcom’s portfolio, Tan said simply: “It doesn’t.” Each of Broadcom’s 22 product divisions runs independently, sharing back-office functions and some sales teams. “They are [each] allowed to invest as much as they need to, to get to be number one or maintain their number one position,” Tan said.

Broadcom views VMware as its twenty-third product division, without an overarching strategy beyond buying assets and running them better. Despite comparisons to private equity, Tan insists that Broadcom is not a consolidator but an operator focused on growth and innovation.

Broadcom’s expansion strategy for VMware involves pushing it into every kind of data center, from private corporate facilities to Big Tech’s vast cloud computing platforms. This forms the heart of Broadcom’s response to European Commission concerns about interoperability between VMware’s software and Broadcom’s competitors’ hardware.

Navigating Regulatory and Market Challenges

While trying to placate regulators, Broadcom faces the threat that Apple — its largest customer, accounting for about 20% of sales last year — may replace its wireless chips in iPhones with in-house designs. Tan is confident in Broadcom’s technology, believing that Apple will continue to value the best technology available.

Broadcom is also reassessing its supply chain in light of recent disruptions due to COVID-19 and US-China tensions. The company outsources most of its semiconductor manufacturing and is considering Intel as a new foundry partner, alongside Taiwan-based TSMC. Broadcom is also exploring insourcing some manufacturing, particularly for substrates, which have become a supply chain choke point.

Looking Ahead

With the acquisition of Zscaler, Broadcom is well-positioned to offer a comprehensive range of cybersecurity solutions that address the needs of modern enterprises. The integration process will be closely watched by industry analysts, customers, and competitors alike, as Broadcom aims to leverage Zscaler’s technology to deliver innovative security solutions.

Broadcom’s strategic acquisitions reflect its commitment to growth and innovation, positioning the company for continued success in the competitive tech landscape. By integrating Zscaler’s cutting-edge cloud security solutions, Broadcom is set to provide unmatched protection for its global customer base, ensuring that it remains at the forefront of the cybersecurity industry.

Stay tuned for more updates on how this acquisition will unfold and its impact on the tech industry.

Notes and Corrections:

i). an earlier version of the story mentioned McAfee as the cybersecurity business Broadcom had acquired previously. We have corrected to note this as Symantec.

ii). the story has been corrected with the fact that VMware deal has been closed.

iii). we will be publishing a series of updates in coming days and weeks. You would want to subscribe to get all updates as some key notes will only be sent to my subscribers.

iv). we have turned off social features, as there are other places to debate our reporting. As necessary, we will add color - as we have done with our thoughts on lazy journalism.

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